New Zealand's productivity is getting better but it still lags behind other OECD countries.

A new report from the Organisation for Economic Co-operation and Development says New Zealand still has a large productivity gap (27 per cent) to other OECD countries because of a lack of investment in "knowledge-based capital" and international connections.

It says New Zealand's policy settings should generate gross domestic product per capita 20 per cent above the OECD average, but we are actually more than 20 per cent below average. This affects New Zealanders' income and wellbeing and comes in spite of the economic upswing.

Investment in physical assets and years spent in education are roughly the same as other countries covered in the report and having relatively high numbers of unemployed and low-skilled workers employed also didn't explain our underperformance.

Instead the OECD work finds the gap reflects weakness in knowledge-based capital which has become increasingly important in driving productivity gains in the digital age.

Knowledge-based capital ranges from things like product design, inter-firm networks, research and development, and organisational know-how. While New Zealand ranks well in software investment and trademarks, the amount of R&D undertaken by the private sector is among the lowest in the OECD.

This reduces the capacity for frontier innovation and businesses' ability to absorb new ideas - the technological catch-up. Cross-country surveys also show the quality of management is below average in New Zealand, which lowers productivity gains from new technology.

More than half of New Zealand's productivity gap relative to the OECD average is explained by weaknesses in our international connections. Global value chains - where production activity is spread across countries - has become more common in international trade.

But New Zealand companies face reduced access to large markets. For New Zealand firms, international transport costs for goods are about twice as high as in Europe. This limits participation in these value chains where the transfer of advanced technologies often now occur.

While not much can be done about its distance to markets, New Zealand's two-way trade flows could be altered to reduce its impact.

The report says trade modelling based on market size and geography suggests New Zealand could reduce the impact of distance by trading more with closer faster-growing markets, such as the emerging market economies of Asia and Latin America.